Intermediate Sanctions

Rebuttable Presumption of Reasonableness

The regulations provide a "safe harbor" (a legal provision to reduce or eliminate liability as long as good faith is demonstrated) under which the compensation is presumed to be reasonable provided certain conditions are met.

If the organization meets three conditions, the burden of proving there is no excess benefit shifts from the disqualified person to the IRS having to prove there is an excess benefit. It’s then up to the IRS to rebut the presumption by furnishing sufficient contrary evidence to show that the compensation was not reasonable.

The conditions are:

• approval by an authorized body
• appropriate data as to comparability
• documentation

Approval by an authorized body

The compensation arrangement is approved (in advance) by an authorized body of the tax-exempt organization, composed entirely of individuals without a conflict of interest (i.e., independent). The authorized body may be the board of directors, a committee of the board if authorized by state law, or to the extent permitted by local law, other parties to whom the board has delegated this duty.

The body must not include anyone with a conflict of interest with regard to the transaction.

A conflict of interest is present if a member:

• is the disqualified person
• is related to the disqualified person
• can economically benefit from the transaction
• is in an employment relationship subject to the direction or control of the disqualified person
• receives compensation or other payment subject to approval by the disqualified person
• has a material financial interest affected by the transaction
• approves a transaction providing economic benefits to a disqualified person, who in turn has approved or will approve a transaction providing economic benefits to the member

A person will NOT be considered to have a conflict of interest if they attend only to answer questions and otherwise recuses themself from the meeting and is absent during the debate and voting on the compensation arrangement.